The Court of Appeal’s decision in Desai v Wood/Re Boscolo Limited (in liquidation) [2025] EWCA Civ 906 provides guidance on the treatment of liability insurance proceeds received by an insolvent company.

It reaffirms that such proceeds are not held on trust for the claimant to which the company owed the relevant liability, but form part of the company’s insolvent estate. For insolvency practitioners dealing with insurance recoveries and competing creditor claims, the case provides a useful summary of the applicable legal principles.

Background

The appellants had engaged Boscolo Limited (Company) under a design contract incorporating the British Institute of Interior Design’s standard conditions. The Company maintained professional indemnity insurance, as required by the contract. After the appellants notified the Company of a potential professional negligence claim (but before legal proceedings had been issued), the Company’s insurer exercised its right under the policy to pay the policy limit of £250,000 directly to the Company, thereby releasing itself from any further liability in connection with the claim.

The appellants then issued proceedings against the Company, claiming in excess of £700,000 in damages, and claiming that the insurance proceeds were held on trust for them. Shortly thereafter, the Company entered creditors’ voluntary liquidation. The only significant asset in the estate was the balance of the insurance proceeds (£246,000). The appellant’s claim was stayed by consent and the Company’s liquidators applied to the High Court for directions as to the correct treatment of the insurance proceeds, under section 112 of the Insolvency Act 1986.

Relevant law

Under the general law, clients of an insured have no beneficial entitlement to the proceeds of the insured’s liability insurance. This was confirmed in the case of Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105, a case where an individual, Mr Chaplin, obtained a judgment against a taxi firm for damages resulting from negligent driving. The company received payment from its insurer and subsequently went into liquidation. The Court of Appeal held that Mr Chaplin had no right to demand payment of the insurance proceeds from the liquidator.

To address the perceived injustice of this (and other similar cases), the Third Parties (Rights Against Insurers) Act 1930 (TPRA 1930) was enacted, providing for a statutory assignment of contractual rights from the insured to the third party in the event of certain insolvency procedures. This has (since 2016) largely been replaced by the Third Parties (Rights Against Insurers) Act 2010 (TPRA 2010) which again provides for a statutory assignment of rights, and also enables the third party to proceed directly against the insurer without the requirement to first establish the liability of the insured (as they had been required to do under TPRA 1930).

Unfortunately for the claimants in this case, where the insurer has already made a payment to the insured settling the claim prior to its insolvency, TPRA 2010 does not assist. It does not confer a proprietary interest in proceeds already paid to the insured.

High Court decision 

In the hearing of the liquidators’ claim in the High Court (Wood v Desai [2024] EWHC 1893 (Ch)), the judge rejected the appellants’ claim that the insurance proceeds were held on trust for them. He dismissed arguments on the basis of an implied term in the contract, a constructive trust of the insurance proceeds, or a claim against the Company for unjust enrichment. Simply, the proceeds belonged beneficially to the Company. The court gave directions confirming that the insurance proceeds were to be treated as part of the Company’s general assets, and were available for distribution to creditors in accordance with the usual priority rules.

Court of Appeal decision

The appellants argued that the design contract contained an implied term that the Company would not (where it knew it was in financial difficulties) dissipate the insurance proceeds, and/or that both the design contract and the insurance policy contained an implied term that the Company would not use the insurance proceeds except for the “paramount purpose” of paying the claim to which they related.

The Court of Appeal applied the test for implication of terms summarised in Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 10, considering whether the implied term was either so obvious as to go without saying, or necessary for business efficacy. The court found that there was no need to imply a term in the design contract restricting the insured’s use of the proceeds, and in any event it was not possible in this case to identify with any clarity what such a term might be. The parties could have included express provisions in the design contract to create a proprietary entitlement, but they had not done so. As to the policy itself, a restriction on the use of insurance proceeds is clearly not necessary for the efficacy of an insurance policy, and it was not obvious that such a thing should have been agreed.

Even if such a term had been implied, it would only have assisted the appellants if it had led to a trust being imposed upon the insurance proceeds – otherwise they would simply have an unsecured contractual claim. The court held that the necessary certainty of intention to create a trust was absent, as was certainty of subject matter. There was no defined part of the insurance proceeds that could be the subject matter of a trust (as the Company was permitted to use them to fund defence costs), and the funds were not segregated or earmarked in a way that would support a trust analysis.

The court also rejected the appellants’ alternative argument, that it would be unconscionable for the Company to retain the insurance proceeds if it was aware that it may not have the financial resources to meet the appellants’ claim. The court held that this amounted to a remedial constructive trust, which is not recognised in English law. There was no pre-existing proprietary right, and the circumstances did not justify the imposition of a trust based on unconscionability. Like the High Court, the Court of Appeal held that the proceeds belonged beneficially to the Company.

Conclusion

Unless there is a clear contractual or equitable basis to the contrary, insurance proceeds paid to an insolvent company form part of the company’s estate and are available for distribution to creditors. If parties intend to create a proprietary entitlement to insurance proceeds, this must be clearly documented. Absent such provisions, the courts will not override the statutory insolvency regime. While TPRA 2010 offers protection to claimants where the insurer has not yet paid out, it provides no remedy once the proceeds have been received by the insolvent company.